Jefferies Lowers U.S. Land Rig Count, Downgrades HP, PES

By Teresa Rivas

Both Helmerich & Payne (HP) and Pioneer Energy Services (PES) were falling in recent trading, hurt in part by downgrades at Jefferies.

Analyst Brad Handler and his team downgraded the names from Buy to Hold, due to the firm’s lowering of its multi-year outlook for the U.S. land rig count. Handler sees exploration and production companies as able to meet production targets with fewer rigs in coming years, thanks to new drilling efficiencies.

He lowered his forecast for the second half of this year to 1,780 active rigs (down from 1,817); in 2014 he sees 1,830 rigs (down from 1,915) and 1,875 rigs in 2015 (down from 2,060).

Here are his thoughts on the two companies specifically:

HP: Downgrade to HOLD from BUY; lower PT to $71 from $74. We maintain that HP is the relative winner in the current environment given its negligible active exposure to the low-end drilling market, and we raise its active rigcount outlook to 286 in 2015 from 267 previously. Yet with modest dayrate risk – we assume 5.7% lower rates by 2015 versus 3.3% higher rates previously — we now model essentially flat EPS for HP through 2016, which can no longer support a mid-$70s fair value, in our view. We continue to find strong Free Cash Flow generation very attractive, however — $2.40/share/year in 2014-15 after the current dividend plus what can be generated from ATW/SLB stake sales – and HP remains preferred within this segment. We lower 2013, 2014 and 2015 EPS estimates to $5.50, $5.55 and $5.55, respectively, from $5.60, $6.30 and $6.65.

PES: Downgrade to HOLD from BUY; lower PT to $8 from $9. PES has among the most exposure in our coverage to obsolescence risk of mechanical and SCR rigs, despite its investments in its mechanical rigs to optimize their efficiency. We now assume the company can grow its active rig count, but to a greater degree through investments in new rigs – we raise capex by 66% in 2014-2015 — and as such it generates less Free Cash, which weighs on our DCF-derived PT. We lower our day rate assumptions modestly as well through 2015 on the lack of recovery in the rig count. We leave our assumptions for its services businesses unchanged. We lower 2013, 2014 and 2015 EPS estimates to ($0.07), $0.05 and $0.10, respectively, from $0.03, $0.25 and $0.30.

He also maintained Hold ratings on Nabors Industries (NBR) and Precision Drilling (PDS).

About Stocks To Watch

Earnings reports, corporate strategies and analyst insights are all part of what moves stocks, and they’re all covered by the Stocks to Watch blog. We also look at macro issues, investor sentiments and hidden trends that are affecting the market. Stocks to Watch gives you the full picture of the U.S. stock markets, all day long.

The blog is written by Ben Levisohn, a former stock trader who has covered financial markets for the Wall Street Journal, Bloomberg and BusinessWeek.